As noted earlier by Houses & Holes, today’s solid bounce in the Westpac-Melbourne Institute Consumer Sentiment Index was a welcome lift for an economy that has struggled to gain momentum despite -2.00% of cuts to official interest rates since November 2011.
The Consumer Sentiment index rose for the first time in three months, increasing by 4.6 points in June to 102.2, partly reversing the 12.9 point fall recorded over the prior two months. Following this month’s increase, sentiment is now running just above the 100-point threshold separating optimists from pessimists and in line with the long-run average (see next chart).
However, despite this month’s bounce, consumer sentiment remains just below its November 2011 level, suggesting that the sharp 200 basis points of cuts to interest rates have failed to inspire consumers. Moreover, consumers’ response to interest rate cuts has been weak by historical standards, running in line with the 1996 rate cutting cycle, but below the 1990, 2001 and 2008 episodes (see below charts).
The Reserve Bank will no doubt be hoping that consumer sentiment continues to lift, given its historically strong correlation with dwelling prices:
Housing construction:
And mortgage demand:
In short, a sustained increase in consumer sentiment is required if the RBA is to achieve its goal of housing activity filling the void left as the mining boom unwinds.
